Malta – A robust tax system that supports business growth

Setting up an organisation in Malta presents many benefits for both local and international companies seeking to establish a presence in Europe. The island enjoys a stable political, social and economic environment and boasts a highly skilled, adaptable and multilingual workforce. In fact, Malta has attracted numerous corporations in the traditional business sectors as well as those more specialised industries.

Being a European Union member state and located in the middle of the Mediterranean Sea, Malta offers close proximity to mainland Europe, North Africa, and the Middle East providing convenience to companies looking to tap into these markets.

The pleasant weather and thriving tourism sector also contribute to Malta’s increasing importance serving as a launching pad for successful business investments.


An Extensive Treaty Network

With over 70 double taxation treaties with various countries around the globe, the tax options for foreign businesses establishing themselves in Malta on the island are numerous.

This extensive treaty network provides protection to Maltese Companies wishing to invest and extend their business portfolio overseas. In an effort to invigorate growth of international trade, the Maltese government has sought to secure Double Taxation Treaties with countries having an extensive exchange of information regulations. For instance, Malta has secured an agreement with the United States of America, a country that has entered into a very limited amount of tax treaties, with highly selective trustworthy countries. The success of agreements such as this, combined with Malta’s wide treaty network has further enhanced confidence and credibility in the Maltese Tax Authorities.


What are Double Taxation Treaties?

Double taxation treaties are conventions between one country and another that aim to eliminate the double taxation of income or gains arising within one of the contracting states and which are paid to residents of the other contracting state. Such taxation treaties thus work by dividing the taxing rights between both of the contracting states, superseding what each country may claim in terms of its domestic laws. Any overseas tax endured by a company in Malta would generally be eligible for relief against the Maltese tax liability arising from the corresponding source of income or capital gain. In cases where no double taxation treaty exists, subject to certain criteria being met, Malta also offers a unilateral double taxation relief system.


Full Imputation System and the Tax Refund Mechanism

The Maltese legislative and regulatory framework are also robust yet adaptable to support business generation and growth. Through local organisational set-ups, companies in Malta may benefit from a number of taxation refund and relief systems.

In other sovereign states, tax is collected at different levels and at different time intervals, resulting in different rates of tax. However, in the case of Malta, any Maltese incorporated company considered to be resident and domiciled in Malta is subject to Maltese tax on its worldwide income at a corporate rate of tax of 35%. When coupling the 35% corporate rate of tax with the benefits provided under the Full Imputation System and the Tax Refund Mechanism, the legislator successfully established a fair system of tax collection.

The distributable reserves of the company may be distributed to shareholders, whether corporate or individuals, by way of a dividend issue. An individual shareholder in receipt of dividend income may opt to declare the dividend income on their tax return. At this stage, the full imputation system will kick in and while the shareholder is subject to tax on the gross dividend income at the applicable individual rates, the tax paid by the company is fully imputed to the shareholder, resulting in tax being levied only at one level, eliminating economic double taxation. By virtue of this imputation system in Malta, many tax practitioners believe that the tax charged and collected at the corporate level is actually tax paid provisionally by the company on behalf the shareholder, provided that eventually, the tax rate applicable on the corporate profits is effectively the rate applicable in the hands of the shareholder.

Besides this, Malta also offers an elaborate tax refund mechanism. When the relevant conditions are met, the tax refund system might prove more beneficial than the full imputation system, provided that the combined effective overall tax burden in Malta could potentially be reduced to a rate between 0% and 10%. Eligibility for such refunds would primarily depend on the nature and source of the income.

To ensure that the operations of the full imputation system and the tax refund mechanism are not abused of, the legislator introduced detailed rules on tax accounting and General and Specific Anti-Abuse Provisions. Accordingly, a Maltese tax registered company is required to allocate its distributable profits into one of the five separate tax accounts depending on the nature and source of the said profits. These accounts are the Final Tax Account, the Immovable Property Account, the Foreign Income Account, the Maltese Tax Account and the Untaxed Account.

It is in the shareholder’s interest to understand how much tax is paid by the company and whether this is paid in Malta or overseas. Information on what level of tax is paid by the company is crucial in order for the shareholder to best understand the extent of the shareholder’s tax burden in Malta. Due to this, companies that distribute reserves are obliged to divulge such information by submitting a Dividend Warrant.


Tax Exemptions and Minimizing Risks

Despite having wide Income Tax Charging provisions, the legislator went through a high-level exercise throughout the years to introduce multiple exemptions.

In so doing, a key exemption is available on interest, discounts, premiums, royalties and certain capital gains accruing to non-Maltese residents. This important exemption means that Malta generally does not have any exit taxes and hence this exemption ensures that a non-resident may actually limit their tax leakage upon a decision to “exit” the Maltese economy. This provides an ideal safe harbor for international clients by limiting the risks involved in establishing a business on the island.

Maltese law also provides for a participation exemption in respect of dividend income or capital gains received from a qualifying subsidiary. By satisfying certain conditions, a Malta based company may have the option to exempt dividend or capital gains received from a qualifying subsidiary, rather than paying tax and eventually receiving a refund. This thus gives the company a considerable cash flow advantage.


Benefitting from a Tax Refund Mechanism

Companies operating in Malta are subject to filing an annual tax return and are subject to a 35% tax charge on their chargeable profits. This would need to be substantiated through a financial audit carried out by an independent auditor. It is here that a company can benefit from Malta’s business-friendly legislative framework. When applying the Tax Refund Mechanism the shareholder may be able to apply for a refund of the tax paid at source by the company provided that the right filings and applications are made.

Upon distribution of dividends from profits allocated to the foreign income account or the Malta Tax account, outlined above, a registered shareholder is entitled to claim a refund of the Maltese corporate tax on those profits. More often than not the tax refund is that of 6/7ths of the imputed tax credit on the dividend. This may, however, be reduced to 5/7ths when the dividend is paid out of passive interest and royalties and other specific income as specified in the law. The tax refund is further reduced to 2/3rds where the company has claimed double taxation relief. In cases where the company opts to pay tax on dividends received from and gains realised on the transfer of participating holdings, a full refund of the underlying Malta tax is given, subject to certain conditions being met.